columbia case book

8/7/2019 Columbia Case Book

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ManagementConsultingAssociation

Casebook2004

How many rollerblades in New York City? How much does the Empire State Building weigh?

How many beer bottles are currently in circulation in the United States? Why are manhole covers round?

Howmuchdoesa747weigh?

HowmuchwineisconsumedeachyearinFrance?

HowcanyousellpeasontheInternet?

How

muchsaltisintheocean?

HowmuchteainChina

?

Aretheretwodogsintheworldwiththesamenumberofhair

s?

Whatistheannualworldwid

edemandforBandAids?


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Columbia Business SchoolManagement Consulting Association

Casebook 2004

Please do not duplicate or photocopy.

2

Table of Contents

INTRODUCTION .................................................................................................... 3

THE MANAGEMENT CONSULTING ASSOCIATION.................................................... 4

COMMON CASE TYPES ........................................................................................ 5-6

THE CASES........................................................................................................ 7-49Business type cases........... ............................................................. 7-47Game show cases....................................................................................................48Estimation cases..................................................................................................... 49

USEFUL FACTS & CONVERSI ONS......................................................................50-51


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Introduction

The Management Consulting Association of Columbia Business School is pleased to present the MCACasebook 2004.

The information contained in this book has been compiled from a list of various sources. In

particular, the cases included have been provided by consulting firms, students and other sources.Case interviews are used primarily to assess two qualities important in consulting:logical reasoning and business acumen. In addition, consulting firms monitor communication skillsand try to gain insight into your personality (are you enjoying yourself? Are you easily frustrated?).They are also looking for you to demonstrate creativity by taking advantage of opportunities to yes, that dreadfully overused phrase think out of the box.

The Casebook includes a discussion of the different case types and provides possible frameworksused to answer them. The frameworks and solutions to sample cases used in this book are by nomeans the only right answer. Time and again recruiters will emphasize that there is no singlecorrect answer to cases. We have provided one recommended option for solving the cases.

The Casebook 2004 is provided free of charge to all paid members of the Management ConsultingAssociation. We ask that you respect the efforts of the many people who volunteered their time toput this book together by not duplicating or photocopying it or sharing the password with non-members.

The book is not to be reproduced without the written consent of the Management ConsultingAssociation of Columbia Business School.


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The Management Consulting Association

For information about joining the Management Consulting Association or to learn more about ouractivities this year, please contact one of the following officers:

President Rodolfo Esquivel [email protected]

Vice-President of Corporate Relations Guillermo Wallis [email protected] of Finance & Membership Alex Kiselman [email protected] of Special Events Lindsay Weirich [email protected] of Publications Jennifer Hartley [email protected] of Summer Term Baris Bilen [email protected]

Chris McIntyre [email protected] of Education Jet Arnaez [email protected] of Mentoring Amy Goldfinger [email protected] of Technology Vlad Warshawsky [email protected]

All club information is also posted on our web site at:www.gsb.columbia.edu/students/organizations/mca/mca.html
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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THE CASES

COMMON CASE TYPESThe major types of cases are:1. Business Cases2. Game Show Cases

3. Estimation Cases

BUSINESS CASES

In addition to testing your ability to solve business problems logically, these cases also testyour general business knowledge. Core courses in microeconomics and marketing providethe basic tools and concepts to approach these cases. You are given a certain amount ofinformation that may vary according to the interviewers style and the type of case. Writedown the pertinent facts.

The ability to ask the right questions in order to arrive at the dynamics and drivers of abusiness or industry is one of the most valuable consulting skills. Some interviewers openthe case with only one line, and expect you to probe for more information by asking

thoughtful questions. However dont spend too much time asking a lot of questions, as youmay appear to be taking a hit or miss approach to the problem rather than setting up aframework of analysis.

Some issues you may wish to consider addressing:

relevant markets and nature of growth in these markets

nature of demand and future market potential

relative cost positions of the competitors

nature of competition, and competitors reaction to new entrants and price cuts

existence of market niches, and their relevance to the client

effects of an increase in supply on industry price levels

barriers to entry and exit existence of competitive advantages such as economies of scale, learning curve, and

other external factors such as government regulations

Focus on the question and the issues on the table. With some information in hand, thinkabout the problem you are being asked to solve. If the case is about declining sales, do notstart to evaluate the companys debt to equity ratio.

MECE or Mutually Exclusive and Collectively Exhaustive is a favorite term of consultants.This means that the framework you use should provide a number of different options whichare mutually exclusive but which together account for all possible causes i.e. collectivelyexhaustive. Applying a good framework ensures that you do not ramble or jump all over

the place.

Finally, creativity, or in consultant-speak, out-of-the-box thinking is also highly valued.

GAME SHOW CASES

These cases test your analytical and creative abilities. They could be anything andeverything. Keep in mind that there is always method to the madness even when you are


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asked to explain why soda cans are cylindrical.

Again, the ability to reason and support a rational line of thinking is the key. The reasonswhy soda cans are cylindrical probably cover a whole plethora of issues from distribution todesign. Some reasons why: cheaper and quicker to produce since you dont need to mold itinto a square shape, easier for consumers to hold, easier to release from vending

machinesso you see this wasnt such a ridiculous case after all.

ESTIMATION CASES

While these types of cases were once seen in most consulting interviews, it is nowextremely rare that you will encounter a pure estimation case during the interviewprocess. However, it will frequently be the case that you will need to make an educatedguess of some number as part of a business case.

The ability to work with incomplete or unavailable data, and generate reasonable estimatesis a crucial skill in consulting. Make plausible assumptions. Dont just pick a randomnumber. Even if it is wrong, as long as your number is grounded in common sense orbacked by a sound rationale, you are fine. For example, common sense tells you that the

population of New York City cannot be over fifteen million or under three million (its eightmillion).

Lay out your logic before you start making assumptions. Set up your answer in a treediagram with the branches as various components of data that will help you arrive at a finalnumber. For example, in estimating the number of gasoline stations two of the branchesyou should consider are the number of cars in the city and geographical size.

Use nice round numbers to simplify the slog of dividing or multiplying. Conduct a sanitycheck on your final number. Even if your assumptions appear sound, you may have made acalculation or logical mistake. For example, does it make sense to have over 600 gasolinestations in Manhattan when this would probably mean a station at every street corner?

A list of estimation questions are included at the end of this book, but should not be themain focus of your case interview preparation. Remember, consulting firms want to seethat you can solve entire business problems, not just estimate the size of the problem.

EXPLANATION OF THE CASES

The sample cases in this book are presented by case types. For business type cases, theonly information initially given to the interviewee is provided in bold text. The remaininginformation was discovered throughout the course of the interview. You will see that,especially in business cases, the interviewer is expecting you to come up with appropriatequestions in order to get the additional data you will need to answer the case. Whenpracticing these cases, we recommend that you wait for the appropriate questions beforesupplying this information.

The following cases were submitted by students and are based on actual cases given tothem during interviews. Keep in mind that the solutions are the ones used by the studentsand may or may not be exactly what the interviewer was looking for. Use the answers asexamples as to how to set up and go about answering a case, and remember that manyappropriate variations are possible.


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BUSINESS CASES

Business Case I WINE MANUFACTURING FIRM

The client is an U.S.-based w ine manufacturing firm looking to expand globally.

They have retained us to advise them on the valuation of a South African basedwine company that they are looking to acquire. Why dont you w alk me throughsome of the things you w ould consider in advising the client?

There are three broad areas: Clients strengths & weaknesses both financially and from a business standpoint Industry growth trends including a competitive assessment in the United States Targets strengths and weaknesses

Objective is to: Evaluate the vulnerabilities need for specialized inputs or labor, power of suppliers

and buyers, threat of competitive attack, need for customer service, etc. Evaluate the variabilities historical sales growth, profit margins and expected

growth trends in the industry

The next step would be to explain the mechanics of the valuation.

1. Identify both a realistic worst case EBIT growth2. Identify a target capital structure for the company3. Carry out a pro forma financial statement projection for five or ten years out.4. Add back noncash items, changes in CapEx and working capital5. Compute free cash flows6. Compute WACC7. Determine terminal value (assume stable growth at the end of projection horizon)8. Discount the free cash flows

In order to determine the WACC for the target, you need to first identify the equivalent ofthe long-term Treasury bond here in the U.S. Next, look at the beta for the target and use amarket risk premium of 4% or so to figure out the cost of equity. You should also add acountry risk premium for South Africa and a size-based premium based on the market capof the target.

Find the country risk premium by identify a bond of identical maturity here in the U.S. andthe spread in yields between the two bonds would be the country risk premium for SouthAfrica.


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Business Case II INDUSTRIAL CHEMICALS FIBER MARKET

The client is a division of an industrial chemicals firm. They are in the business ofmanufacturing fibers and have had sales of $1 billion. Their concern is that thesales have been declining steadily over the past five years. Their objective is toidentify three to five new lines of business wi th total revenues of $300-500 million

utilizing existing capacity in the fiber manufacturing facilities. They have come upwith a new fiber that has very good absorbency, something like 10 times itsweight, which is a breakthrough in the industry. The client is looking to enter theurban pet care market in the U.S. with this new high-absorbency fiber. They wantto manufacture pet care pads, sort of diapers for pets in urban areas. The clientwould like us to evaluate the potential of this idea, which is where you come in.

**Build a framework off of the 4 Cs: Company (value chain) Competitors Customers Cost

Company: Established industrial product manufacturer Fibers are specifically used in fashion apparel industry and for cigarette filters Sales around $1 billion End users dont know their brand No marketing in the traditional sense No advertising experience

Value Chain: Deal with distributors Distributors sell products to retailers (50% markup) Retailers handle relationship with end customers (100% markup)

Client wants to continue using intermediaries reluctant to enter new area ofretail

Distributors know this and exploit it

Competitors: Market size? Interviewee needs to estimate on their own Sample estimation:

Id try to get a sense for the size of the urban pet owner market. Lets assume thatof the 100 million households, 40% or 40 million households are urban households.Of these, lets assume that 40% of the households, i.e., 16 million households, ownpets. Im considering only dogs and cats as relevant pets for the product. Letsfurther assume that each of these households has 1.5 pets. This results in about 24million urban pets that are potential users of the sponge in question. I dont have agood idea how often these sponges would need to be replaced. I know my niece goes

through 4 to 6 diapers per day. This is probably too high. (Interviewer offersreplacement of sponge every other day) OK, that would result in 24 million timesabout 180 sponges a year or 4.32 billion sponges annually. Wow, that seems like apretty big number! With a 20% market share, our client should be able to sell assuming that there is a customer need for it about 800 million pads annually.


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Competitive products: No major national brand. Local pet stores sell for $0.50 perpad.

Demand is small and sales are restricted to local stores Clients proposed product has a higher absorbency, but thats it

Conclude on potential revenue for our client:

At any rate, let me assess the dollar revenue potential that this product is likely togenerate. If the product is priced at the current market levels of 50 cents a sponge,the 100% retailer markup means that the distributor receives 25 cents and the 50%distributor markup would leave the client with only a little over 16 cents per sponge.With an ambitious annual sales estimate of 800 million pads, the revenue potential isabout $128 million.

Customers: Location Price points

Cost: Cost to build capacity Cost to manufacture Costs to launch product

**Thoughts to consider for conclusion: Client is looking for 3 to 5 product ideas with $100 million revenue potential each Its not even clear if there is a customer need for the product Its not clear that the client has the execution quotient to bring this product to

market.


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Business Case III PHARMACEUTICAL COMPANY GROWTH

The client is a large pharmaceutical firm w ith a market cap of $85 bil lion. Theyhave about 4% market share and are currently enjoying a 34 P/ E ratio. Theindustry average P/ E is about 29.

Over the next five years they are looking at a healthy growth in their EBITmargins. However, for three years thereafter, the EBIT margin growth is likely tostagnate when three of their blockbusters come off patent. Subsequently,blockbusters currently in the pipeline wi ll hit the market and their EBIT marginsare expected to healthy growth levels. The CFO of the firm us to help her figureout if the three-year plateau five years out is an issue she shou ld be worried aboutand if so what external options she can pursue to fix it?

1. Clarify clients position in the industry2. Explore competitive developments and projected trends3. Explore some possible external options

Client Financials: $10 billion in revenues EBIT at $3 billion Gross margins of 80% Totally debt-free

Client History: Typically taken the OTC approach when blockbusters have come out of a patent Price will drop to 20% of pre-OTC price

Competitive Developments: Consolidation

External Options: No experience with either mergers or acquisitions Licensing

o Fairly common in pharmao License potential blockbusters that much smaller firms or firms without their

clout are currently developing and that will hit the market during the threeyears in question. Generate sales to grow their EBIT margins.


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Business Case IV REGIONAL RETAIL BANK

The client is a regional retail bank. Recently, it has begun facing threats fromInternet-based financial services firms and o ther non-traditional firms. Depositsare declining and the bank has approached us with a strategy to grow the bottomline. Walk me through some of the issues that you consider and work streams you

would set up in coming up with some recommendations.

Possible Framework:

Profit = Price x Quantity Cost

Price = Revenue per customerQuantity = Number of customersCost = Overhead

Client: Well-established regional bank New England-based $100 million in profit 3 million customers, very loyal Acquisitions strategy Lots of products:

o Deposits/savings accountso Small investmentso Credit cardso Mortgages

Known for trust and security

Options to Grow:1. Grow revenue per customer by increasing the number of relationships or

products/services that the client has with its existing customer base a customerloyalty enhancing strategy

2. Increase number of customers by offering a wider variety of products3. Decrease customers that are not the high revenue generating customers eliminate

unprofitable customers from its base so that the number of customers goes down,while revenue per customer goes up

4. Increases number of customers and increase the relationships or products/serviceswith its customers

5. Decrease costs

Each of these strategies will result in the bottom line increasing, but the choice of thestrategy will be based on the clients core competencies and the competitiveassessment, along with a consideration of how the industry is likely to evolve in thefuture.


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Business Case V PRESIDENTIAL ELECTION

Im sure you know that the campaign for the Presidential elections is currentlyunderway. Both Bush and Kerry have proposed instituting a change to theretirement benefits policy for all employees w hereby every employee makes acontribution ranging from $500 to $2000 to a retirement account and the savings

grows tax free until the employee retires. We have been approached by a clientthat runs a large mutual fund to help answer tw o questions they have: Is this a bigopportunity? What are the various possibilities and challenges they wou ld face?

Possible Framework:1. Dynamics of the mutual fund industry,2. Incremental savings entering the mutual fund market3. Regulatory or exogenous factors affecting the mutual fund industry as a result of

changes to existing policy

Mutual Fund Industry: Companies solicit investments from individuals, retirement accounts, etc. Invest the money to create a well-diversified portfolio (that typically minimizes risk) Manage the portfolio and collect a fee Very large industry (over $1 trillion)

Incremental Savings Entering under this new Policy: Last year, $170 billion entered the industry Estimate the additional investment based on the size of the working population Assume recurring annual contributions and use $1000 to make it easy

Other regulatory issues or exogenous factors No

Can the client make money?

What is the management fee? 1% What are the expenses? $10 annually and 10 basis points (1%) per $1000 invested Means that for every $1000 invested then, make $10 in revenues but have $10 plus

$1 or $11 in expenses But, in the second year when the assets grow, begin to make a profit. If the $1000

grows to, say $1200, revenues now look like $12 but expenses are only $11.20. Ifyou estimate how long a customer keeps the investment, you can present value thecash flows to figure out a lifetime customer value to the client.

Plus, the customer would want to invest an additional $1000 the second year


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Business Case VI WHISKEY SALES

A multi-billion dollar liquor manufacturer began operations over 100 years ago,primarily focusing on whiskey. Now w hiskey accounts for less than 5% o f sales.

Overall sales of whiskey w ere up 1% per year over last 20 years and our clients

sales have tracked that. Last year, however, overall sales were up 2% , while ourclients whiskey sales were down 15%.

Why? What should they do?

Possible Framework:1. Company:

Sales = Price x Quantity2. Competitors3. Customers

Company

Price has not changed.

Quantity: Have not sold as much whiskey this year

Has anything changed? 5 master blenders have implemented a new formula that reduces cost per bottle by

$0.25 and have assured management that there is no noticeable impact on taste No changes to packaging No testing of the new formula. Did company do anything differently last year than it

did in the previous 20 years?

Has anyone noticed? 20% of one customer segment, the loyals that constitutes 5% of all customers but

45% of all sales has noticed and are extremely angry 20% * 45% = 9% decrease in quantity

Also need to consider the bottom line Current contribution margin per bottle is $4 Margin before must have been $3.75 Before: 100 * $3.75 = $375 After: 91 * $4 = $364 Change in formula hurt sales and profits

Customers

The whiskey market is divided into high end, middle segment, and low end whiskies. Ourclient competes in the middle segment.

At new whiskey bars, people will buy high end whisky to drink straight, but are satisfiedwith low end whisky for mixed drinks. Last year sales in the high end and low end whiskysegments grew, but sales in the middle segment declined by 4%.


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CompetitorsOur clients competitor lowered their price from $12 a bottle to $11 a bottle.Our client only has one competitor in the middle segment and they split the market 50/50.

(Use 100 as a base each player sold 50 bottles of whiskey)

Last year, our clients sales decreased by 15% and the overall market decreased by 4% insize:15% * 50 = 7.5% decrease in our sales to 42.54% * 100 = 4% decrease in market sales to 9696 42.5 = 53.5 current sales for our competitorCompetitor increased their sales by 7% in absolute terms.Their market share increased by 5.7% to 55.7%.Our clients market share dropped by 5.7% to 44.3%.

What should the client do?

Change the formula back to appease the angry loyals.

Do targeted marketing to these loyals to let them know. This might be difficult, but will benecessary in order to move the whiskey upmarket.

Also, the company could reposition their whiskey as a more premium product. They shouldnot answer the price cut of its competitor with one of their own. Plus, cutting price to regainmarket share would reduce profits even further:Now: 42.5 * 4 = 170After: (42.5 + (.02 * 50)) * 3 = 130.5This is intuitive: we would be cutting out margin by 25% to achieve an approximately 2%increase in sales! The key for our client going forward, then, is better marketing, whichmakes the brand relevant in a changing market.


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Business Case VII SHIPPI NG COMPANY

A clients company operates 1 passenger and 2 cargo ships in the Baltic Sea,between Finland and Germany. The ships are old and need to be replaced. Thechoices before him are to continue w ith the same configuration, 1 passenger and 2cargo ships, or to go in for 2 hybrid ships, wh ich can handle both cargo and

passengers.

Possible Framework:1. Current operating environment2. Costs and benefits of each option3. Potential showstoppers for operating the new hybrid ships

Current market Lucrative market Not much competition

Passenger ships:Profits = $1000 per person per round tripLeaves port every other evening at 6 pm and arrives the other port at 6 am. Headsback to the original port at 6 pm, getting back at 6 am

Cargo ships:Profits = $2000 per trailer unit per round tripLeaves daily, one from each port at 6 am and reaches at 6 pm

Operation of Hybrid ships:Leave daily, one from each port at 6 pm and reach at 6 am

Potential showstoppers:

No problems in changing the cargo loading time from 6 AM to 6 PM for the hybridconfiguration

The cargo would be in the hold, and wont harm the passengers experience, which ismostly indoors anyway, since the Baltic is a cold, cold place and no one wants tostay outdoors

Capacities? Passenger: Capacity of 1000 people, though occupancy is 600 Cargo: Capacity of 120 trailer units, with a utilization of 100 Hybrid: Capacity of 800 passengers, occupancy of 500 and capacity of 100 trailer

units, with a utilization of 90

Growth Potential?

The markets mature.

Costs for buying /building, and operating the ships? Same operating costs Hybrid ships: $250 million each to build Passenger ships: $200 million each to build Cargo ships: $100 million each to build


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Consider the profits in each case over a 2-day period:

In the old situation, there would be one round trip for passengers and 2 round trips forcargo, giving total profits of $1 million.

In the new situation, there would be 2 round trips for passengers and 2 round trips for

cargo, for a total profit of $1.36 million.

Thus, the new situation results in ~$65 million extra profits annually. Given that the extracost for the new configuration is $100 million, the client can easily recover his extrainvestment and increase the ROI.


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Business Case VII I PUBLISHING COMPANY

A publishing company has 2 divisions, one that prints SEC disclosures and anotherthat prints mutual funds prospectus. In the first division, the shareholdercommunications are printed and sent to all the shareholders. It entered themutual fund prospectus business 10 years back, and this has helped w ith revenue

growth. It had revenue growth of 25% over 5 years and then 15% over the next 5years. The CEO wants to know why the rate of growth has slowed and what he cando about it.

Possible Framework:Revenue = Price x Quantity

Company:

The clients services are retained by Investment Banks. When a company needs to accessthe capital markets or make SEC disclosures, it is required by law to send the information toall its shareholders. The company uses an Investment Bank in order to access the markets,and the bank gives the information to the client, who prints it and hands it to the company,which in turn mails it to the shareholders. So the client does not produce content ormaintain its own distribution lists.

Two divisions: Mutual Funds prospectus: $100 million in 1988, $300 million in 1993, $600

million in 1998. Shareholder communications: $500 million in 1988, $1 billion in 1993, $1.7

billion in 1998. (Shareholder communications are responsible for the decline ingrowth)

Competition: 3-4 firms that offer printing services

No differentiation Banks only switch because of personality issues Prices and services are the same

Prices: Prices have been constant.

Quantity: The overall number of investors has grown. Market share has been constant. No internet effects. Number of booklets printed has increased.

How does the company charge its customers? Per page basis. The number of pages in a prospectus has gone down.

Why? Shareholder communication standards are mandated by the SEC, so the customers

have to print what is required by the SEC.


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In 1993 the SEC mandated the easy English usage rule, which forced companies toreduce all the legal jargon that was difficult to understand.

What can the client do? Raise prices:

o Clients costs are much less than those of Investment Banks

o Wont result in customer switchingo Viable option

Increase quantityo Gain market share

Few options to win other customerso Cant print more pages because of the SECo New markets

Annual reports (similar to prospectus) Textbooks, etc.


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Business Case IX CARDIOVASCULAR HEALTH PROGRAM

Your client is a major pharmaceutical company, which has been approached withthe follow ing business proposition. You have been asked to lay out how your clientshould evaluate the opportunity: A small hospital in W est Virginia has developed atotal cardiovascular health program for its outpatient population. The program has

been in place 3 years and has been highly successful in improving thecardiovascular health status of the patients as measured by several parameters.The hospital would like to sell this program to other hospitals for a fee, butcould not undertake such a task on their own. Instead, the West Virginia hospitalwould like to license the program to your client, and your client would market it toother hospitals.

Note: You are asked to develop a methodology for evaluating this opportunity to license acardiovascular health program from this hospital and market it. They are not asking for afinal Go/No Go answer.

Possible Framework:Present methodology for evaluating as a series of very basic Yes/No questions.

1. Does this program actually work and can it be applied with similar success in otherhospitals?

2. What is the potential NPV of this opportunity?3. Are there other opportunities available to your client that would create a greater

return on their investment?If the answer to any of these key questions is no, then the client should not pursue thisopportunity.

Does the program work and is it transferable? Study results are not always straightforward Which parameters were improved? Quality of life? Overall survival rate? This may not be able to be extrapolated to other patient populations in other settings

**The client is a pharmaceutical company and could internal scientists look more carefullyat this one hospitals results and decide if the program could be successful if widelymarketed.

What is the potential NPV? Look at the cash flows each year. Main source of revenue would be hospitals paying a fee for the rights to use this

program, which conceivably could be on a subscription basis, per-patient, one-timethe possibilities are endless.

The program calls for specific types of medications, such as ACE-inhibitors, beta-blockers that the client makes, which might present a major cross sellingopportunity and boost market share for specific pharmaceuticals.

The licensing fee paid to the W. Virginia hospital would be a major cost, and again, itcould be structured in countless ways.

Incur costs to market the program to hospitals. One additional issue is reputation.

What are other opportunities?Discuss other areas that might have a higher return or a better fit with core business.


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Business Case X PHONES AND SATELLITES

Our client is a major provider of long-distance telephone service in the UnitedStates. It owns a subsidiary that is a communications satellite company in thebusiness of launching satellites and then marketing (selling or leasing) thetransponders on the satellite to companies o r to phone service providers. The

subsidiary has proposed a $400 million expansion involving new satellites, and theclient would like to know whether this is a good investment or not. The satellitesubsidiary has not been making a return on capital up to the parent companysstandards, and the client is not even sure if it should be in this business theymay want to sell it. What do you tell them?

Possible Framework:Profit = Revenue - Cost

Company Last year, they had $50 million in revenues and $48 million in cost, for a profit

before taxes of $2 million. The parent doesnt think thats a good return. Revenues from:

o $40 million was from annual leases for 20 of the firms 100 transponders;these do not include service charges

o $10 million was from annual service charges on the 80 transponders used bycustomers outside the parent company, including both the 20 that are beingleased out and 60 transponders that were sold before the satellite waslaunched (something that satellite companies frequently do to raise capital inthe expensive development and launch phases of the business).

o 20 of the companys 100 transponders are used by the parent company (theclient) for their phone service, and the subsidiary receives no revenue forthat.

Revenue should be adjusted to include the value of the services provided for free to

the parent company because the parent will have to pay for them if the subsidiaryis sold.

o The parent uses 20 transponders, which apparently have an annual valuefrom leasing of $40 million.

o The service charge on each transponder, which is $10 million/80. So thats atotal value of $42.5 million in annual revenues that the subsidiary is providingthe parent.

The subsidiarys revenues should be more like $92.5 million. Costs:

o $28 million for tracking and otherwise operating the satelliteo $20 million that the parent company is charging the subsidiary each year for

5 years to cover the cost of a satellite that was destroyed upon launch a fewyears ago -- Satellites are a very risky business 1 in 7 of all new satellites

fail when launched and thus satellites are frequently insured for far lessthan their value because insurance is very expensive. In fact, there is a 10%chance of failure over five years for every satellite in operation.

The subsidiarys cost should be only $28 million (other is sunk cost) The subsidiarys profit should be around $65 million, which is quite good.


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The client is given this new number and still wants to exit. Why and what should theyconsider?

Loss of future revenue Ability to get the same access to satellite service Ability to get the same price for satellite service

Competitor might purchase the satellite company Capital requirements for core business Focus on core business

**The reason they still wanted to sell it despite its profitability was that the long-distancebusiness is a fairly steady business the returns are small but low-risk.

Satellites are very risky, and the parent company felt that their shareholders were too riskaverse to be comfortable with it. Essentially, they saw that they had a different risk/returnprofile from their subsidiary, and decided that the two werent a good match.


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Business Case XI OSTEOPOROSIS OPTIONS

The client is a major pharmaceutical company. It has two new drugs indevelopment, both of w hich are prescription treatment-type drugs (as opposed topreventative drugs) for osteoporosis, a disease that affects older w omen. Thedevelopment period for new drugs is ten years, but the last three years which

involve testing consume more than half of the cost. Thus, the client wants you todecide whether to test the two drugs, test one of the drugs, or to abandon thedrugs altogether.

First, however, Id like to ask you to think through two problems for me. One is,what is the size of the potential market for osteoporosis, and two, how do youthink the markets for preventative drugs and treatment drugs differ?

1. Estimate the size of the market for osteoporosis drugsAssume that were only looking at the United States. The population of the U.S. is about270 million, slightly more than half of which is women. So say there are 135 millionwomen in the U.S. I think osteoporosis begins to be a concern in women over 50, so weneed to figure out how many women are over fifty.

Okay, well, my guess is that about 25% of the population is over 50, so thats about 35million potential customers and we should remember that as the population ages,more people will fall into this category, so potential customers will increase. Naturally,for a treatment drug, we would then need to get the rates of incidence (to find out whatpercentage of women in the correct age group actually develop osteoporosis) andwhether that is trending up or down.

The number of people willing to take a preventative drug would depend on severalthings. The randomness of the disease I dont know much about osteoporosis, but iftheres a clear high-risk group, and few others get the disease, then those people arelikely to be customers but people outside the group are not. On the other hand, if the

disease is really random in whom it strikes, then more people are at risk, but with alower risk for each person.

Thus, people would make their decisions based on the cost of preventing the diseasebalanced against the consequences of getting it. So, if theres a treatment available thatminimizes the problems associated with getting the disease, then few people will takethe prevention. On the other hand, if the disease is not treatable and has severeconsequences, many people will want to take preventative measures. Then, itll comedown to very pragmatic factors:

Is the drug easy to take Is it a simple pill every morning or is it several pills a day with restrictions on

diet, etc? Will it be covered by insurance? Are there side effects?

2. Detail differences between treatment and preventative drugs.**Marketing Patients already suffering from a disease will go to a doctor, so doctors will be

the ones making choices among competing drugs. For a preventative drug, however, the patient will likely have more influence,


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because even if its a prescription drug, they may or may not choose to take it,and they may find one drug more convenient than another and thus make achoice (while patients suffering a disease are likely to put up with inconvenienceto make themselves feel better).

Doctors will respond most to effectiveness because they will likely be morescientific and have done more of their own research (even if its just talking to

colleagues) about a drug than patients. So thats the most important thing tostress.

Patients, however, will be less attuned to the science behind the medicine, andwill also be very conscious of side effects, convenience, etc.

So a treatment drug would be mainly advertised in medical publications andsimilar areas, with a stress on the effectiveness of the medication.

A preventative drug, however, would likely be advertised more broadly, targetingthe group that might be at risk for the disease, and stressing the awfulconsequences of getting the disease and how easy and safe it is to take theprevention.

Should the client come out with preventative or treatment drugs?

At the moment theyre treatment drugs, although they could be preventative drugsin the future. The normal pattern is for drugs to come out as treatments, becauselonger testing is required to prove value as a preventative. So the drug will bereleased as a treatment and then the company would continue testing to see if it hasvalue as a preventative. But consider the shorter-term possibilities as a treatmentdrug.

(At this point, an issue or probability tree would be useful to diagram.)

First, look at the consequences of the two choices to test or not to test. For thedecision to test, consider the likelihood of success, to find out whether success waslikely in general and whether the two drugs had different chances of being

successful. (Etc., etc. for the whole tree).

Other issues to consider:

Are the likelihoods of success different for the two drugs? Should you test one or both? Is the cost of the 2 tests the same? Decision delivery convenience (pill/shot etc) Potential Market side effects Revenue frequency (how sold per treatment) Competition Potential to lose share or position in market

Priority could be given to finding out about competition Is the client the first company to develop a treatment for osteoporosis? NO If not, is this treatment significantly different? NO Will the clients drugs be generic or compete on price? NO Does anything else distinguish the clients drugs? More effective? Fewer side

effects? NO How well have the existing drugs done? WELL


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This will simply be duplicating the existing drugs to enter the market? YES

In order to be successful, you must differentiate the product somehow. Advertising Distribution channel advantages

During the course of the project, it was discovered that a small start-up company on theWest Coast was developing a new type of treatment that would essentially make theexisting treatment obsolete?

Fairly certain it will work The firm must get financing to undertake the expensive last three years of

development

Recommendations?1. Cancel testing of the existing drugs immediately2. Buy the small start-up


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Business Case XII BOOK OF THE MONTH CLUB

Your client is a book club, the type of club where you get 4 books free and arecommitted to buying 5 more books at retail price, which is usually less than at abookstore. Also, there is a book o f the month you get unless you return themonthly card. Their profits are going down. What do you recommend?

Possible Framework:Profits = Revenue CostRevenue = Price x Quantity

1. PriceRemained stable

2. QuantityDemand hasnt decreased in the market, but the clients sales have.Demand has gone to: internet based companies, traditional bookstores, books on tape,libraries, and BIG BOX RETAILERS.

3. Costs Actual cost of books Acquisition cost of customer Cost of keeping a customer Shipping Costs

How do book clubs acquire customers?Ads for these types of clubs are found in magazines and newspapers. The actual price ofthe ads has not changed.However, the prices have changed because of fewer customers, so the acquisition costper customer has gone up.

As a side note, how would you estimate the size of the book market in the US?

There are 250 million people in the US. Taking out infants and illiterates I would narrowthat number to 200 million. I would say on average each person buys 4 books per year.That would be 800 million books at say, $20 a piece, for a grand total of 16 billion peryear.


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Business Case XIII PARTYING PLANNING COMPANY

Your client is an American party-plan selling company, which sells power toolsthrough hosted parties. Tupperware is the classic example of this type of selling.The company has a small core of ful l-time corporate marketing staff that recruitsconsultants, who are independent contractors.

The consultants recruit hosts, who hold the parties. The hosts invite purchasers totheir parties to buy the power too ls. The hosts are compensated with a free giftand discounts on their purchases.

The consultants get a percentage of their hosts sales. In addition, the consultantscan recruit up to four layers of other consultants and get a portion of theirrevenues. The company started eight years ago and has had explosive revenuegrowth. Recently the rate of growth has started to slow.

The client has asked you two questions: what is the factor slowing grow th, andhow can they improve the situation?

Possible Framework:Consider the layers of the company --

1. Purchasers2. Hosts3. Consultants4. Central Marketing

PurchasersThe purchaser behavior has not changedon average they buy as much and as frequentlyas before.

Hosts

Nothing has changed here.

Consultants Nothing has changed there. However, the number of consultants being recruited has dropped, both with

corporate marketing and via other consultants. The incentive arrangement hasnt changed.

**It turns out that they have basically used up all the raw material in their area. Whatcan they do?

New locations Direct corporate marketing efforts Extra incentives for consultants International expansion


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Business Case XIV SOYBEAN SHIPMENTS

Soybeans are a commodity. 70% of all soybeans are used for chicken and pig food.It is a very efficient source of energy. Another use for soybeans is splitting it upinto soybean meal and soybean oil. 80% becomes the meal and 20% the oil. Manysoybeans are grown in South America, but demand for the meal and oil is growing

in Asia. I am trying to decide if I should process the soybeans into meal and oil inSouth America and ship to Asia, or if I should ship to Asia and do the processingthere. What should I consider?

Consider the cost differences between processing in the two places.Major costs would be:1. Labor2. Overhead3. Distribution4. Transportation

LaborBoth areas have relatively cheap labor and much of the process is automated.

OverheadSimilar in the two areas

DistributionOnce the product is there, the distribution to the rest of the area would be the same.

TransportationCall a shipper and get a quote.

$10/ton to ship whole beans from South America to Asia$20/ton to ship oil to Asia$10/ton to ship meal to Asia

Since 80% is meal and 20% is oil, the shipping cost would be $8.00 for the meal and $4.00for the oil, for a total of $12.00 per ton.

To know if this matters, you would have to find out what the margin is. If the profit on oneton of soybeans is $10.00, then the $2.00 savings is significant. If the profit is $1,000.00then the $2.00 is probably not that important of a savings and the intangible or other costswould determine where you would want to process.


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Business Case XV INTERNET GROCERY SHOPPING

A grocery chain in New England is considering offering an Internet delivery service(i.e., groceries can be ordered via the I nternet and delivered directly to yourhome). Including the client, there are three main grocery chains in the area. Oneof them has already entered the I nternet market. The only other grocery store

currently offering I nternet delivery service in the U.S. is a M idwest store. Shouldthe client enter this market? If so, what issues w ould they face? If not, howshould they protect their market share?

Possible Framework:1. Competitors2. Customers3. Cost

CompetitorsRegional competitor:

They began about 6 months ago and approximately 1% of their sales are from theInternet. They are forecast growth.

Prices have been mixed with no noticeable trend.

Customers Appears to be a small market (competitor is at 1% of sales) Conduct a current customer survey to measure interest Conduct a new customer survey to determine new additions

o Obtain a listing of residents in proximity to each of our stores and crossreference them to credit cards used, Price Club membership, checksreceived, etc.

o Determine who is not shopping at our stores and find out if they would usethe Internet service.

o Determine if consumers are willing to pay a premium for items purchased

through the Internet to help with the pricing strategy.o Determine the potential market size figuring in cannibalization and pricing.

Costs Cost of server and maintenance of it Delivery and order processing personnel Insurance for the delivery people Inventory warehousing costs

Where can they store?Three options: The client could store inventory at each retail store

Use the current warehouse distribution centersBuild a warehouse specifically for the Internet service

The answer depends on the time frame and risk

RecommendationsIn sum, the client needs to determine the market potential, cannibalization and the cost ofrunning the service. If there seems to be at least some demand and there is extra capacityin the distribution centers, the client should at least try the service for a little while. It wont


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be too costly for them and this way, if the trend does begin to pick up, the client is ready forit.

If the demand seems low or the client decides to not pursue the opportunity, they do needto be careful about protecting their market share. Perhaps they can do that by emphasizingthe shopping experience at a retail store. They can run commercials showing that it is more

pleasant to roam the aisles in search of your favorite foods, rather than trying to recall whatyou like by staring at a computer screen. They can also use the surveys to determine ifthere is anything about their current retail stores that can be improved to keep thecustomer in the store, such as music, cleanliness, staff, etc. In this way, the client can meetthe consumers needs in the retail store and entice them to stay.


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Business Case XVI CANCER DRUGS

Our client is a major pharmaceutical company based in the U.S. w ith internationalreach. They are known in the industry for their cancer drugs. Recently, thecompany has experienced a decline in sales growth and is considering a newbusiness opportunity. The U.S. market has many private companies that focus

solely on cancer care. The client wants to own and operate a chain of privatecancer care centers in China. These would be out patient type centers wherepatients could come in for treatments; long and short-term stays are possible.How would you evaluate the attractiveness of this opportunity?

Possible Framework:1. Customers2. Competition and Regulation3. Cost and revenue4. Company capabilities

CustomersTo assess the demand for the cancer care center, we would need to determine the numberof people in China with cancer.We can look at the number of people currently being treated through cancer care units ofhospitals, private care, etc. Alternatively, we could estimate the percentage of thepopulation with cancer by looking at affliction rates across various countries and thenmultiply by the total population of China.

CompetitorsThere are no cancer care centers like this currently in China; it would be a new concept.Hospitals, nursing homes, private nurses will be competitors. Also, China has a history oftreating ailments through herbs and other natural substances; these old world physiciansare a major competitor.

Cost and RevenueRevenues are comprised of the number of treatments and the price per treatment. Since thecenter would focus strictly on cancer, the quality of the service would be better than thecompetition. In China the government pays for all healthcares. In fact, the government haspredetermined fees that it will pay for all kinds of treatments. They will not pay for morethan that amount.Since our client is providing premium service, their costs are higher than those of hospitals,etc. The client may not even be able to cover the cost of the care they want to providethrough the predetermined rates.

The client needs to assess if there is sufficient demand amongst the wealthier segments ofthe Chinese population for a cancer care center. First, segment the population of Chinabased upon income and focus on the top income levels. Apply the percentage of cancer

incident to this number to estimate the number of potential cancer patients in the selectedsegments. Calculate the cost of serving each patient and fixed costs to determine abreakeven number of patients. Compare this breakeven number with the total potentialcancer patients to determine the market share the client needs before they can turn aprofit.


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Business Case XVII TRANSPORTER MACHINE

Your client has developed a revolutionary product. It is a transporter machine thatcan take anyone (or anything) placed in it from NYC to London in 10 minutes.(This machine is similar to the contraption on Star Trek where the person isbeamed to the location desired) How w ould you price one trip?

Possible Framework:1. Demand2. Price and Cost3. Alternatives available

Demand Primarily for humans and small packages Narrow focus to business travelers/top executives or very wealthy individuals

(To estimate this number, determine the number of top executives at all publiclytraded companies and add to that executives at larger, privately held companies. Forthe wealthy, take the U.S. population and estimate the number of people in the topincome brackets.)

Price and Cost1. Estimate the costs and then include a markup or2. Price an alternative product and determine the value of the extra benefits our clients

machine offers.**Of course with either method recognize the tradeoff between price and the number oftrips demanded, as well from an economics perspective the marginal cost and revenues.

Use Option #2: The time savings is the most valuable attribute.Look at the total compensation vs. total hours worked to determine anhourly wage.Or, link the revenues of the business to the executive to determine

how much revenue is generated by one hour of his/her time.Or, consider the closest alternative and potential mark-up for thisbenefit

Alternatives Email and fax for data Flights (regular or Concorde)


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Business Case XVII I BICYCLE SALES

Your client designs, manufactures, and markets a full line of bicycles. Thecompanys sales and profits had been grow ing until three years ago when itsprofitability flattened and began declining. Why did this happen and how can theclient fix the problem?

Possible Framework:Profit = (Price x Quantity) Costs

RevenuesGrowing roughly at the same rate as before the downturn.

CostsExpenses are increasing disproportionately.Costs are broken down between administrative and operating costs.

Operating costs appear to account for the bulk of increased expenses.Fixed costs are growing but variable costs appear to account for the bulk of increasedexpenses.

Both components of variable cost direct and indirect have been increasing. Bicycles have become more sophisticated, with better materials and components.

However, the increasing cost per bike has been comparable to the growingprice/revenue per bike. Indirect costs are increasing disproportionately.

Allocation of indirect materials is about the same (usage per bike has stayed flat) Allocation of indirect labor costs are responsible

Work-in-process inventory has been increasing. Capacity is not an issue Time spent in setup-resetting paint booths, welding jigs, dies and presses, etc. has

increased Time per setup has decreased Number of setups has increased, which makes senses make sense since the bikes

have been getting more sophisticated with better materials. There are probably morematerial options for bike buyers to choose from, forcing manufacturers to produce agreater of bike varieties. This would cause an increase in the number ofmanufacturing setups that were required.


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Business Case XIX DIESEL SHIP ENGINES

There is a $250 mill ion German company that makes diesel ship engines. Theymake 27 engines per year. They have 90% of the German market share. This pastyear they posted a loss of $30 million. The two questions I would like you toanswer are: 1) what are the causes of the loss and 2) what are the options fo r this

company.

Possible Framework:Profit = Revenues Costs

General Company Information Operating at capacity Engines are used to power ships and are made based on blueprints supplied by a

design house that the company pays a licensing cost to. The engines are not going to be replaced anytime soon and are commodities.

Revenues Number sold has not decreased Price has not gone down substantially

Costs Costs have not gone up The company has just built a new modern factory taking advantage of all the cost

savings of better production processes and automation Labor costs have gone down as well Cost structure of the company

o 60% materialso 20% laboro 10% overheado 5% licensing

o 5% other

Competition Market share has declined from 100% Cost structure of competitor:

o 55% materialso 5% less labor costs

Whats going on? Labor is in a union and the company just negotiated a better deal for themselves. The competitors material costs are lower because of volume discounts. The competitor makes 150 engines per year. The competitor is located in Korea.

What should the client do? Build more capacity and sell engines outside of Germany Make another product Form a buying consortium with other companies that use the same materials in

order to get the volume discount Sell the company to a competitor.


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Business Case XX POST MERGER INTEGRATION

We just finished a post merger integration project between two mid-sizedpharmaceutical companies. Each of them has broad product portfolios consistingof only branded or patented prescription drugs; neither company sells OTC drugs.The combined companys sales are the largest in the world, comprising 10% of the

pharmaceutical drug market. All organizational aspects of the merger arecomplete (new positions have been assigned and assumed).

The new Head of Development comes to us and asks if we can analyze thecombined Development Portfolio. He is certain that some of the projects inDevelopment can be eliminated; others he feels are blockbusters and should befast tracked; others are middle of the road type products that may be successfuland can continue through the normal development process. He wants our team toidentify the appropriate product portfolio.

FYI , here is what the development process looks like: R&D $ P re-clinical $ Clinical$ FDA Approval $ Launch Each step in this process can take months or years tocomplete. Additionally, the number of products in each stage also decreases. For

example, there may be 200 products in R&D, 75 in Pre-Clinical, 50 in Clinical, 20 inFDA approval and 5 in Launch.

Possible Framework:1. Consumer demand2. Competition3. Expected profits and risk of each product in development

Consumer Demand Identify what ailment the product is for Determine the total number of people facing this illness Determine the current market size for the illness

Project it out to the appropriate number of year(s) the product requires before it canbe launched

Competition Look at what the competition is doing First mover advantage Concentrate on what the clients competitors have in their development pipeline and

their timeline of release relative to ours Understand the potential reactions of competitors to our clients portfolio decisions

Profit Potential and Risk Determine the market share our client could expect for each product Make pricing assumptions based upon the costs incurred and competitors prices to

forecast revenue streams for each product Costs:

o Research, development and testing costs incurred prior to launcho Manufacturing Costso Sales & Marketing Expenseso Distribution $ Customer service

Costs for each product can then be subtracted from the revenue to determine profits


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for each year. Take the present value of the profit streams to determine the total profit potential,

using an appropriate rate that considers the risk of the product.

Evaluation Consider level of risk -- speak with the scientists working on each product to

determine the probability of the product actually being launched Calculate the expected profit: (Probability of success) * (Profit Potential) +

(Probability of Failure) * (Potential Loss) The potential loss is the total of the costs incurred prior to launching the product Then select the top expected profit products, considering competitive positioning and

timelines

[The interviewee actually drew a decision tree here showing the two branches of failure orsuccess.]


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Business Case XXI TOY MANUFACTURING

Your client is the third largest toy manufacturer in Europe and has come to youbecause their sales have been stagnant or even declining during the last fewyears. Sales had been rising before. Why are sales like this? How can the clientimprove the situation? Which elements would you like to analyze?

Possible Framework:1. Company2. Competition3. Customers4. Channels

Company Currently in the top 3 leaders in traditional toys aimed at pre-school children (0 to 6

years), girls and boys. Highest volume products are: plastic toys, dolls, vehicles, action figures and games Manufacturing is done in Asia Profit margin is about 10-15%

Competition Flat growth for the industry Estimate the size of the market in Europe:

Consider the market of 0-14 year old children. There are 800 million people inEurope, which translates into about 200 million households if you take anaverage of 4 people per household. Not all households have children, andsome have more than one, and so I guessed that there would be about 1child on average in this age category per household, so 200 million children.

Enumerate important occasions children at that age get presents from theirparents: birthday, Christmas, and maybe two other occasions, which gives 4

in total. Each time the parents would spend $20 on average. So this meansthat each child receives toys for an amount of about $80. Multiply the $80with the 200 million children to find estimate for the toy market in Europe ofabout $1.6 billion.

Customers Electronic game business has been the fastest growing segment over the last decade

in the toy industry

Channels Subsidiaries in the main European markets, responsible for sales in these markets The sales force visits the distributors of the toys, which are mainly supermarkets and

department stores on the one hand and toy shops on the other hand The client has a good brand image in its markets

Recommendations Three options:

o Grow their electronics business themselveso Buy a company that already is specialized in electronic gameso Form a partnership with such a firm


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Business Case XXII SKI RESORTS

Our client is the association of New England ski resorts. The profitability ofmember resorts has been going down fo r two years. The association has hired us(1) to find out why and (2) to recommend what to do about it.

Possible Framework:Profit = Revenue CostsRevenue = Price x Quantity

Revenue Price per lift ticket has not gone down Number of skiers has gone down dramatically

o Is this demand or supply-based?o Demand: Are people going other places to vacation?

Look at lift ticket sales in other skiing locations (in and out of NewEngland)

Customer survey to find out why Turns out that more people are going skiing out West instead of

in New England Why?o Costs: Equipment, transportation, lodging and lift

tickets transportation is more expensive it the West,so skiers are paying a premium

o Supply: Has the weather been warmer in the past 2 years? NO

Costs Fixed costs have not changed Variable costs have not changed Cost structure:

o The mountain, lifts, ski patrol, snowmaking, etc. are fixed costso Variable costs will be a very small portion of the total

Recommendations Increase number of skiers

o Reduce priceso Offering regional passeso Offering additional services

Increase revenue per skiero Increase priceso Adding on lodgingo Increase equipment sales

Drive costs down Spread fixed costs over the entire year, instead of only three or four months, by

building golf courses, water slides, etc to generate revenue during the summer


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Business Case XXIII THE BIG APPLE

A large food conglomerate has a small plant in Maine that produces apple juicefrom one specific type of apple which i s grown locally. The apple juice is premiumpriced and positioned. The company bought the plant from a local farmercooperative a few years back w ith the hopes that the company could increase the

plants capacity through better management. The plant is currently operating atfull capacity.

There was an accident at the plant recently where a worker broke his leg. Thisincident prompted a review by OSHA (the government review agency in charge ofoccupational safety). OSHA has in formed the company that an additional $2million investment is needed to bring the plant up to current safety standards. Youhave been hired by the company to help i t decide what it should do. Specifically,you need to provide your client w ith a list of options and then identify the one thatyou recommend.

Additional information provided (if interviewee asks probing questions): The apple juice product is breaking even for the company. There are several other premium apple juice brands. The competition is stiff. There is a raw material constraint (there is a limited number of this specific kind of

apple which is grown each year). The demand for the apple juice is strong. Consumer demand is only limited by the

availability of supply. The strength of the demand stems from the uniqueness of theproduct (that special kind of apple).

Producing a concentrate for the juice will not work for this plant (too costly toconvert machinery and this specific kind of apple does not lend well to such a use).In other words, you cannot grow more apples or stretch more out of the currentsupply.

The companys competitive advantage is its marketing expertise and distributionsystem.

The Official Approach:There are three main options:1) Walk away (shut down the plant or sell it)2) Invest more money into the plant3) Arrange a partnership agreement with the local farmers cooperative who originally soldthe plant to your client, which would place the plant operations in the hands of the farmerswhile the company would market and distribute the apple juice. [This is the approach thatshould be recommended to the client.]


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Business Case XXIV STEAM BOILER HOSES

We w ere asked by a diversified manufacturing client to help turn around thesteam boiler hose division. This boiler hose division provides boiler hoses for bothexternal customers and the clients boiler division. How would you structure ananalysis at restoring profitability? Where do you expect to save costs?

Additional information provided (if interviewee asks probing questions): Boiler hoses are sold both with original equipment and as replacements. There has been increasing price pressure in the industry. The client is third of eight industry participants. Last year P & L showed (as percent of sales): Raw Material 70% Labor 20%

Distributed Overhead 10% SG&A 15% Profit (15%) Raw material is a commodity petrochemical. At least two of the other companies in the industry are making moderate profits.

The Best Approach:The product has been over-designed, requiring excess raw material. The answer shouldconsider the following organizational implications:

How is our product engineering operation wired into the marketplace? (There is littlecontact between the engineering and marketing/sales organizations).

What kind of feedback are we receiving from our sales force? (Customers aredelighted with our hoses, but dont require all of the product features).

Are there other areas in the company where similar problems exist?


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Business Case XXV WIDGETS

Two companies are the only competitors in an industry and produce exactly thesame product. Your client was the pioneer in the industry and has controlled 70%of the market for many years. Their competitor has always followed price changesinitiated by your client. Recently though, the competitor has aggressively low ered

prices 15% and has cut into your clients market share reducing it to 60%. Yourclients profit margins are only 14% , so they are hesitant to match the price cut,but they are afraid that they w ill continue to lose share if they dont.

Assume that there is no threat of new competitors entering the market and thatthere are no substitute products. All inputs are commodities and are readilyavailable. The end-users are sophisticated and make their purchasing decisionsbased mostly on price. How has the competitor managed to cut prices sodramatically and still make money and what would you advise your client to do?

Additional information provided (if interviewee asks probing questions): Industry growth has historically been 5% per year, but flattened out in the last year. There are many buyers and the price of this product is a negligible input cost. Your client and its competitor both are financially strong divisions of larger unrelated

companies. Raw materials make up 50% of the total cost of producing this product. All other

costs are fixed. Both competitors use essentially the same process and have very similar cost

structures. Capacity can only be modified in large increments and the competitor brought on a

new line 6 months ago.

One Approach: Market size is constant and market share for your client fell from 70% to 60%, so

output fell by about 14%.

Since 50% of the total cost is variable, 50% must be fixed. A 14% drop in volume would therefore equate to a (14% x 50%) = 7% increase in

average unit cost for your client. When the competitor increased market share from 30% to 40%, his volume

increased by 33%. If the competitor has a similar variable cost component of 50%, then their average

unit costs would have gone down by approximately (33% x 50%) =16.5% as theyspread their fixed costs over a larger volume.

The competitor had an overcapacity problem and could make more money withhigher volume by cutting prices. The 16.5% cost reduction offset the 15% price cutthey incurred and their volume increased 33% so they came out way ahead.

Recommendation:

1. Match the competitors price and follow their price changes.2. Aggressively try to regain customers who were recently lost by offering extra

inducements to try to get back lost market share.3. The client is larger, they have a slight cost advantage and can fare better in a price war.4. Advise your client to incrementally raise prices and make sure the competitor follows.


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Business Case XXVI CREDIT CARD COMPANY

A major credit card company has faced strong competition from new credit cardsentering the market. They are considering dropping the $50 annual fee. What arethe economics of such a decision and should they drop the fee or not?

Additional Information (Assumed) $50 annual fee multiplied by the number of members. To overcome this loss, they have to increase the revenues from consumer purchases

(1% from the retailer). Is it likely that current cardholders will spend more per year if the annual fee is

dropped No. Theyd still have to pay off their balance every month. Therefore, the only way to increase revenues from consumer purchases is to

increase the number of AMEX holders.

Possible Framework:1. Determine how American Express makes money.2. Evaluate the pros and cons of dropping the annual fee.3. Make a recommendation.

Estimations/AssumptionsNumber of current cardholders = 4% of the U.S. population250MM x 4% = 10MM current cardholders$50 x 10MM = $500MM annual loss by dropping the fee

Current percentage revenue: 10MM members x $1,000 annual purchase (average)[10MM x (1,000 x 1%)] = $100MM (Estimate of current percentage revenue)

Can AMEX attract enough new members (without a fee) to offset a $500MM loss?Each new member contributes $10 (1% of $1,000 annual purchase)

(500MM / $10) = 50MM new members are needed50MM new members is equivalent to 20% of the population (gut check)

RecommendationBased on these assumptions, increased membership equivalent to 20% of the population isprobably not likely. Dont drop the fee.

May want to consider varying the fee (sensitivity vs. new members).


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Business Case XXVII HEALTHCARE COMPANY

A large Healthcare company has decided it is interested in substantially increasingthe scale of its operations. Its goal is to double total sales and profits in less thantwo years. As a consultant brought in to assist them, what would you do?

Additional Information (Needed): What are the specific objective (quantifiable) advantages to pursuing and achieving

this goal? What is the current scope of operations? In what areas of healthcare does the company do business? What is the current

market share in these areas? What plans has the company already considered / is already considering? What is the competitive nature of the industry? What would be the effect on sales and profits of reducing prices/margins? What potential is there for expansion by acquisition? Do they have the financial

capability? Do potential targets exist? Can they get financing? What will be the reaction of the competitors to this expansion? What is their financial condition? What will be the reaction of the customers? What are the relevant current and anticipated government regulations?

Possible Framework:Profits = Revenue CostsRevenue = Price x Quantity

Revenue increases are achieved by: Selling more of the current products to current customers Selling new products to the current customers Selling current products to new customers Selling new products to new customers

**The suitability of each of these options depends on the particular environment.

In the particular example of this case, it turned out that the company could achieve its goalsonly by selling new products to new customers via some form of diversification.

Next, you should consider the potential for increasing sales by means of diversificationthrough acquisition or joint venture. The relative benefits of each will depend on financialresources as well as the existence of suitable targets or partners.


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Business Case XXVII I SPORTING GOODS STORES

Your client runs a national chain of mall-based stores that specialize in athleticshoes and also carries sporting apparel (hats, t-shirts, etc.). There are two othermall-based athletic shoe retailers w ho are very similar to your client in terms ofsize, product mix and strategy. Your client informs you that profits are declining

and wants you to determine why and recommend a strategy to deal wi th it.

Additional information provided (if interviewee asks probing questions): Sales are down at all three mall-based retailers, but industry sales are up overall Costs have increased, but all increases have been passed along to consumers to

maintain margins. Non-traditional competitors have emerged who offer lower prices but no service. Customers fit into two segments, users and fashionites. Users represent 40% of

sales and seek out durable products and knowledgeable salespeople. Fashionitescomprise the remaining 60% and want to look good in the hottest new sneakers, butare more price conscious than the users.

Possible Framework:1. Customers2. Competition3. Costs and Revenues

Customers Users depend on variety and quality service and have remained loyal to the mall-

based stores Price conscious Fashionites dont care about service and go to discount stores Fashionites are in the malls for other needs, so shop at mall-based stores

Competition Sneaker sales are up overall, but have decreased in the malls

Discount Stores:o Discount stores offer lower prices, but little variety and no serviceo Discounters stock the hottest shoes at lower prices, so they must be stealing

market share among the more price conscious

Costs Costs have gone up, but so has price, so margins are relatively unchanged Profits have decreased, so quantity must have decreased also

Recommendations Since the mall-based retailer depends on both segments to survive, it cannot cut

back on service for the users. It can manage its inventory more effectively to offer discounts on the fastest moving

hot shoes. Losses due to the discounts on these shoes can be offset by increasedvolume, rapid turnover and complementary sales on t-shirts and accessories oncethese customers are in the store.

The prices do not need to match the discounters since the mall-based store benefitsinherently from mall based traffic and can charge a slight premium for theconvenience of location.


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Business Case XXIX IN-STORE PHARMACIES

A major discount retailer has over 1300 pharmacies. Pharmacy operations havehad flat sales in a grow ing industry. The profitability is very poor relative to theindustry. The retailer has a history of decentralized pricing and promotion forpharmaceuticals, leading to strong autonomy in field operations, as well as w ildly

inconsistent pricing. Customer pricing complaints and customer attrition ischronic. The new head of pharmacy operations has engaged us to solve thepricing issue. How should we proceed?

Possible Framework:1. Who are the customers?

a. How do they select a pharmacy?b. How important is price?

2. How do we price?3. Who is the competition?

Customers Customers are generally older, repeat, discount-sensitive shoppers Customers may initially select a pharmacy on referral, location, or price and tend to

build strong loyalty to pharmacy sue to personal relation with pharmacist and highswitching costs (transfer of records, etc.).

Price tends to be a major factor. Particularly given nature of customer (usually pay incash from fixed income) and trust relationship (Price fluctuations tend to be verybad).

Inconsistent pricing on a given item may lead to price shipping, exposing allpurchases to scrutiny and losing a customer.

Pricing Recommend a standard mark-up from cost, with price matching to be determined by

the pharmacist at the store.

As mentioned before, this leads to wildly different pricing from store to store, asdifferent pharmacists are vigilant to different degrees regarding optimal pricingstrategies.

Competitors Competitors come in three distinct groups: chain drug stores (Walgreens, Duane

Reed, etc.), independent pharmacies, and discount chains with pharmacy operations(Wal-Mart, Kmart).

Client is in the discount group, but competition is fierce between groups.

RecommendationTest a pricing program where prices are set centrally for a number of stores in differentmarkets. In this test, set prices very aggressively for items identified as key items, and try

to make up margins on non-key items. Monitor results, adapt and roll out if volume andprofits warrant.


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Business Case XXX VIDEO GAMES

The CEO of a large, diversified entertainment corporation has asked our team toexamine the operations of a subsidiary of his corporation that manufactures videogames. Specifically, he needs to know if he should approve a $200 million capitalrequest for tripling the divisions capacity. You are a member of the team assigned

to this project. Assume you and I are at the first team meeting. What are thecritical issues we shou ld plan to examine to determine if the industry is anattractive one for the CEO to continue to invest and why?

Additional information provided (if interviewee asks probing questions): The division is the third largest manufacturer of hardware in the industry with ten

percent market share. The top two producers have 40 and 35 percent market share.The remainder of the market is shared by small producers. The division sells to abroad range of consumers.

The divisions sales have increased rapidly over last year from a relatively smallbase. The current estimate is annual sales of 500,000 units. The current estimate ofindustry hardware sales is 5 million units annually. Industry growth has been strongover the last few months, although sales growth has slowed.

The current sales price for the basic unit is $45. The division remains less than 20percent of the parent company sales. The two top competitors develop, manufacture,and sell both hardware and -software. While our client makes and sells its ownhardware, it only sells licensed software. The industry growth of software continuesto increase.

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